2011-09-13 § Leave a comment

WHY DO THEY CALL IT A PONZI SCHEME

“Social Security is a Ponzi scheme”. This is such an obvious falsehood, we have to look at why it is being said. When a politician makes this claim, what is he or she trying to accomplish?

The answer: it’s a way to evade blame while we tear up Social Security obligations.

From 1940 to 1988, the Social Security tax rate changed year to year so that the taxes collected matched the benefits paid. It rose steadily from 1% to 7.6%.

In the 1990’s, there was a surplus. The economy was strong, unemployment was low, wages were stable. The demographics were favorable, with a large workforce: the baby boomers were still working. The tax rate could have been reduced at this time, but it wasn’t.

Instead of lowering the tax rate, the money was spent. To maintain the appearance of propriety, Treasury bills were deposited into the “Trust Fund”. This is not like the trust fund you might leave to your grandkids. It’s more like an escrow account, where year-to-year surpluses are collected and deficits are paid out, with T-bills used to smooth out the cash flow. It avoids the problem of retirees having a delay in their benefit check while the tax rates are being adjusted by Congress.

After 1990, it was no longer used this way. A steady flow of money was collected from employees and employers, and used for federal expenditures as it was received. The pile of T-bills in the Trust Fund grew wildly. This was very convenient because no buyers were needed — the funds were coming hand over fist. From 1998 to 2009, the surplus was never less than $100 billion each year.

The period of time from 1990-2010 was where people say the Trust Fund was “raided”. Don’t be misled, the mechanism didn’t change — it’s just that the size of the IOU’s were allowed to grow tremendously. Instead of thinking of Social Security as a pay-as-you-go social insurance program, Congress started using it as a source of general tax revenue and it’s been that way ever since. The federal budget came to depend on that extra $100 billion every year. It’s built in.

But demographics and economic changes were happening that would eventually bring this flow of money to a stop.

By 2011, the boomers had retired, the economy was in shambles, unemployment was high, and wages were low. Compounding this, the Obama administration cut the payroll tax rate for 2010-2012 in an effort to stimulate growth. Now, obligations to retirees are such that, instead of providing a steady flow of money that the government could tap, the Social Security system requires that the T-bills in the Trust Fund be redeemed. It’s time to pay the piper.

Suddenly, just as we are looking for any and all sources of revenue, the government cannot tap Social Security as a source of money; instead, money must go the other direction. If you’re a politician, what do you do? You need to raise taxes, but you can’t do that. Raising taxes simply does not happen in the new millenium. (We’re the country that issued and renewed tax CUTS in the face of massive deficits.) You’re going to look like a failure if you don’t come up with a bunch of money, but there is no money. The solution is….avoid blame! At all costs.

Because if you get the blame, you lose your job and all your influence. You might have to go back to selling insurance, or something.

How to shift blame? You can’t accuse your opponent, because he didn’t do anything. The damage started long ago, back in 1990.

Perry’s solution: talk your way out of it. Since Madoff, the word “Ponzi scheme” has supremely negative connotations. If you can convince enough people that Social Security is a Ponzi scheme, then you accomplish your damage-control goals. (A) You can reduce or stop paying benefits, and it looks to observers just like the catastrophic “blow-up” phase of a real Ponzi scheme. (B) You can throw that stack of specially-marked T-bills in the dustbin, and breathe a sigh of relief. You just defaulted without LOOKING like you defaulted, because (C) people are already convinced the scheme was doomed from the very beginning, that failure was inevitable. That’s what happens when people invest in a Ponzi scheme, right? Stupid, shortsighted people.

To recap:
– for 20 years, we’ve been collecting SS taxes in excess of what SS needed, and spending it all
– now, SS needs a tax rate hike; but AMERICAN POLITICIANS DO NOT RAISE TAXES. Period.
– one solution is to allow the system to collapse. We just need a fall guy.

Another way to extricate ourselves from this situation is to go further into debt: instead of today’s workers paying yesterday’s workers, we could make tomorrow’s workers pay yesterday’s workers. That seems a bit too cruel, since we’re already making tomorrow’s workers pay for today’s budget follies.

Or, we could….(drum roll)…..raise taxes, and balance the federal budget. But that would be too simple.

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